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Haldane warns of ‘disaster myopia’ delaying recovery

Financial markets are today “over-estimating” the likelihood of a repeat of the financial crisis, Andrew Haldane, the Bank of England’s executive director for financial stability said, warning that “psychological scarring” of the recent “disaster” could lead to “risk appetite and risk-taking being lower than reality might suggest”.

Releasing in a paper on Thursday that examined the years following the Great Depression and the UK recession of the early 1990s, Haldane argued that the "very disaster myopia” that contributed to the recent crisis “may be retarding the recovery".

Haldane emphasised the need for regulators to relax capital requirements for banks in the short term “to support risk-taking”, highlighting the persisting drought in lending as underscored by the slump in the ratio of credit supply to gross domestic product.

The senior policy maker, who is a member of the BoE’s new macro-prudential financial policy committee, urged the FPC to “act symmetrically” by “cushioning” the decline as well as “arresting the rise in credit and debt”.

Specifically, Haldane suggested that UK banks could be asked to cut the amount of loss-bearing capital they hold from nearly 10% to 7.5%. A similar relaxation in bank regulation helped to revive lending and growth in 1933 after the Great Depression, he claimed.

Comment: Haldane’s proposal is a bold idea but not without risk itself. If it worked, the cost of credit would come down, leading to a boost in lending and more substantial growth. But the policy could also be counter-productive, by raising the cost of funding for banks and squeezing the credit supply.